Michigan Supreme Court Issues Decision on Small Employer Group Health Coverage

Small employers may soon expect to see provisions in their health plan policies requiring them to make minimum contributions to their employees' premiums as a result of a recent Michigan Supreme Court decision. On May 17, 2011, the Supreme Court of Michigan rendered a decision interpreting a provision in the Small Group Health Coverage Act (the "Act"), a law that requires every insurance carrier wishing to provide health care benefits to small employers in Michigan to offer all of its small-employer health plans to all small employers. MCL 500.3701 et. seq.  Specifically, the Supreme Court addressed the narrow issue of whether a certain provision of the Act prevents an insurance carrier from requiring a small employer to pay a minimum percentage of its employees' health insurance premiums.  Priority Health v. Commissioner of Office of Financial and Ins. Services, ___ N.W.2d ____, 2011 WL 1884723, Mich., May 17, 2011 (NO. 139189).

In this matter, the Supreme Court reviewed policies Priority Health's ("Priority") policies that required an employer to contribute to or pay a portion of its employees' premiums. Priority asserted that a minimum employer contribution requirement combats adverse selection by encouraging a greater number of healthy employees to participate in the employer's health plan, thereby allowing carriers to charge lower premiums.

In the proceedings leading up to the Supreme Court's decision, the Commissioner of the Office of Financial & Insurance Services¹ ("Commissioner") concluded, in response to Priority's request for a declaratory ruling, that an insurer's use of minimum employer contributions is inconsistent with the Act. The Commissioner found that an employer's failure to pay a minimum percentage of its employees' premium is not among the reasons specified in the Act for which a carrier may refuse to renew an insurance plan.

The Commissioner's decision rested upon interpretation of MCL 500.3711, which provides as follows:

(1) Except as provided in this section, a small employer carrier that offers health coverage in the small employer group market in connection with a health benefit plan shall renew or continue in force that plan at the option of the small employer or sole proprietor.

(2) Guaranteed renewal under subsection (1) is not required in cases of: fraud or intentional misrepresentation of the small employer or, for coverage of an insured individual, fraud or misrepresentation by the insured individual or the individual's representative; lack of payment; noncompliance with minimum participation requirements; if the small employer carrier no longer offers that particular type of coverage in the market; or if the sole proprietor or small employer moves outside the geographic area.

The Commissioner relied upon the guaranteed renewal provisions of the Act, which include this provision and MCL 500.3707, that require small employer carriers to guarantee the renewal of their health plans at the option of the employer except in the six identified circumstances.  Since an employer's failure to comply with a minimum contribution requirement is not specifically listed as an exception, the Commissioner reasoned that it would be inconsistent with the Act "to allow a minimum contribution requirement at the time coverage is issued, yet mandate renewal without regard to the employer's share." Thus, the Commissioner concluded that Priority's minimum contribution requirement was unreasonable because it was inconsistent with the guaranteed-renewal provision of MCL 500.3711.

Priority appealed the Commissioner's ruling to both the circuit court and the Court of Appeals, and those courts affirmed the Commissioner's interpretation of the Act.  The Supreme Court then granted Priority's appeal.

The Supreme Court found that the Act "does not expressly permit carriers of small-employer benefit plans to mandate a minimum employer contribution in their policies." Rather, the Act permits carriers to include provisions that are "reasonable" and "not inconsistent" with the Act per MCL 500.3707(1).

The Supreme Court determined that the Commissioner and the Court of Appeals improperly relied upon the guaranteed renewal provisions of the Act, stating that the provisions do not limit the initial coverage that can be included in the policy, but instead mandate the renewal of the initial policy that was offered to the employer unless an exception to such rule exists. The Supreme Court, therefore, concluded that a carrier is "not prohibited from including a provision in plans offered to small employers simply because it is not listed in MCL 500.3711(2) among the reasons for nonrenewal. Rather, unless a provision directly conflicts with the enumerated reasons, it may be included in a plan so long as it is reasonable and not inconsistent with [the Act]."

The Supreme Court was careful to note that its ruling did not speak to the question of whether Priority's minimum employer contribution provision is unreasonable or inconsistent with the Act for any reasons other than those addressed in this case.

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¹The Office of Financial & Insurance Services ("OFIS") has since been named the Office of Financial & Insurance Regulation.